Evernote Raising $50 Million To $100 Million At A $1 Billion+ Valuation
techcrunch.com
techcrunch.com
Last year DropBox made $240m from from 2m paying customers (out of 50m users). So about $120/customer. DropBox's valuation is around $5-$10bn, around 20-40x revenue. Which given their growth rate seems a reasonable revenue multiplier.
Over the same period Evernote made $18m from 750k paying customers (out of 20m users). So about $24/customer. A $1bn valuation would give a multiplier of 50x.
LinkedIn is currently trading at 45x revenue - a figure that's been relatively stable for a while.
So arguably 50x is high but not ridiculously so, if Evernote manages to double their customer base over the next couple of years (or their revenue per customer) which isn't unfeasible, it'll look cheap at that price.
(Given Evernote costs $45/year that presumably means most of their customers signed up relatively late in the year resulting in the average revenue per customer being $24/year, so even if they only managed to keep their current customers they'd make 34m this year bringing their multiplier down to 30x)
Even larger tech companies like GOOG, MSFT, and ORCL trade at 3-4. So, looking at it analytically, the P/S of the average recent IPO is very high, and Evernote's valuation is extremely high, even compared to them.
It's not unusual that later stage companies will trade at lower multiples, and as companies become more mature their multiple drops. A good way of looking at it is in terms of future revenues, what's the chance of company doubling their revenue in the next couple of years ?
For Walmart it's almost negligible, for Google it's small but not completely out of the realms of possibility but for Evernote and DropBox it's actually quite high. They're the leading products in immature markets.
So, do you believe that Walmart will double in size in the next 2 years? I don't, and that's why their ratio is so low.
The valuations are getting to the point where they only make sense if Earth had many, many more people on it. Or if you are no longer looking at the fundamentals and are only betting that there's a "greater fool" who will come along after you and take the shares off your hands for more than what you paid for them.
I would guess "greater fool" is in operation, and not any belief in value or growth.
>The valuations are getting to the point where they only make sense if Earth had many, many more people on it.
The fact is, it is still very hard to gauge how much a company will succeed by.
Take the example of Friendster etc and Facebook; when Facebook started, Friendster etc were the dominant players; however, now, we all know who's the dominant player in social. At one point, they may even have had the same valuation.
My point being, if two companies in the same market are getting $1 billion valuations right now, it doesn't necessarily mean that people think the market is worth $2 billion down the track; some people are hoping one will win over the other.
Indeed, if Evernote develops some killer features and dominates it's space, it'll be a steal for $1 billion
What kind of addressable market do you see for Evernote, and what sort of margins do you see them making over the long term? I just don't see an online note taking app being so difficult to reproduce, so I don't know if they have pricing power to generate the cash necessary to support a $1B valuation. Particular after you consider execution risk, and then leaving room for this round of investors to make an attractive return.
Across the market the P/S is 1.28 according to this and it looks like the healthcare/internet industry is tops at round 4-5. Even a 'moderate' 20x is insane and not good for our industry from a holistic perspective.
Valuations are usually based off of earnings, not revenues. Using revenues doesn't make much sense, unless you don't care about actually making money. You know, like Groupon. If you're spending 2 dollars to earn 1, who cares what your revenues are? Only in the land of bubbles does it make sense.
Based on this math, Apple should be worth nearly 10 trillion dollars.
I don't have the energy to figure out the growth rate implied by a 50X multiple on sales, but I can assure you it is astronomical - unreasonably so.
But this doesn't mean that a company can't be worth more than its cash flows would indicate. Suppose the existence of a company (lets call it Instagram) threatens lots of cash flow of another company (for arguments' sake, call it Facebook). How much is Instagram worth to Facebook?
Instead of using Instagrams cash flow to value the company (easy! zero!). You have to use the incremental (and negative) cashflows of Facebook due to Instagram's existence. If Facebook stands to lose, a few hundred million a year to competition, suddenly, Instagram is very valuable indeed, but only to a small, small number of entities - Facebook, and probably Google.
In the end, it's all a speculative judgement call. But don't fall into the trap of evaluating small startups based on their own cash flow.
All that said, I agree. 50x is stupid.
The companies you are comparing it to are part of the bubble too. Their valuations are not set in stone.
http://www.frbsf.org/publications/economics/letter/2007/el20...
"The market's meteoric rise is typically justified in the popular culture by some superficially plausible "new era" theory that validates the abandonment of traditional valuation metrics."
So valuing them at 50x revenue now is saying all returns will come from outperforming 100% annual growth... color me sceptical.
When the crash comes, pensions and endowments will stop seeing tech venture funds as a safe investment so they'll shift their money elsewhere, leaving VC firms without money to invest.
this article from 2010 - http://techcrunch.com/2010/05/28/video-evernote-ceo-phil-lib... -said they make an average of .25 a month per customer. if that's still true then they actually have a pretty decent amount of money coming in.
if anyone has more recent numbers i'd love to see them.
Make no mistake, there is a bubble in early stage companies/financing. What is driving it is the same. runaway demand. This particular bubble is different than the last, because the primary implication of the last has not yet been absorbed. The regulatory structure for raising capitol and 'exiting' has not caught up to a simple reality. New technology displaces old technology faster than regulated exits can be executed. Just look at Groupon. Why do I, as a business, list with groupon, when I can just as easily list with 600 competitors who might be more specialized/niche?
I think there's a strong correlation between the end of the recent Housing Bubble, and the start/ramp-up of all these $Billion tech companies.
I think you're right that rich people need to put their money somewhere, whether that makes this surge in tech valuations a bubble, I'm not sure, I sincerely hope not; but I am fearfull of when the "rich money" starts looking for greener pastures...
If memory serves, the only reason the Housing Bubble happened in the first place was because of the end of the "web 1.0" tech bubble.
Is history repeating itself?
Well Groupon had a pretty obscene private valuation as well. To your point though, aren't pension funds and endowments only taking a small portion, and putting it there for the same reason? Higher potential returns at increased risk? And those return demands are being driven by future payout expectations contrasted with existing returns? Whether you're a multi-millionare or a multi-billion dollar pension fun, getting 1.6% on your money isn't going to cut it.
Could Evernote beat them all or raise to a market share that warrants a 1 billion valuation. Absolutely. They can and they have. the product is fascinating: easy, fast, ever present, cloud integrated and intuitive.
However, can Evernote sustain this position for half a decade? Absolutely not. Here's why:
- the goal Evernote is chasing is to ambitious and is being chased by bigger dogs
- in this field integration with OS is key. Microsoft and Apple clearly have the upper hand
- viral he network effect of Evernote's biz model is not strong enough to keep people using the platform. The churn rate is very big. If you start using Apple notes is very hard to switch, for example.
I've been following this company for a while, and as much as I respect their execution I simply think this number is a reflection of current market conditions, nothing more. Hence cast my vote for a bubble.
EDIT: reference: http://ecorner.stanford.edu/authorMaterialInfo.html?mid=2799
The charm, at the moment, is that they're one of the few one stop shops for files and note management that has a passable mobile client. It's something glaringly simple that a lot of people want (especially the %90 of the population intimidated at the idea of integrating a few services). If Google Docs ever get serious about their mobile client and/or if Dropbox cater more to this kind of crowd (I think a simple note editor on the web and their mobile clients would be well used), I expect Evernote to be in trouble.
A better valuation would be the sum of the equity that has been sold (for actual money) - liabilities + cash on hand + discounted future earnings at some reasonable growth rate (this can be industry specific).
IOW, what would a single entity be willing to spend in cash to acquire the company today.
I don't see how saying Evernote is a "one billion dollar" company has any merit at all.
For what it's worth, when acquisitions happen it's almost always above the shares x price number, so I think it's reasonable to call Evernote a $1bn company if the shares x price number works out that way.
So it's not strange that valuations go up after an acquisition, and in my formulation, they would also go up as well, and for the same reason.
On the one hand, you're right: if everyone is using misleading valuation calculations, then they're all relatively misleading by the same amount.
That still doesn't make these numbers remotely helpful. Here's a thought experiment:
Company X sells $10K in equity at a $1 billion valuation, with no revenue. Wow, good for them.
Company Y sells $15K in equity at a $1.5 billion valuation with no revenue, and promptly acquires Company X for $1.1 billion in cash and stock.
Well color me impressed! That's an amazing exit for Company X! Incredible. Bravo. /sarc
It's both easy and cheap to be a paper billionaire when valuations are calculated as shares x 'last price of an individual share'. Anyone can sell their company for $1.1 billion dollars with minimal actual capital changing hands, or value created.
FWIW, the real problem isn't the valuation numbers per se, it's when people start talking about "losses". Evernote's stock drops, and somehow they "lost" $600 million in "value". Uh, no, they didn't. They never had that value to begin with, and didn't even lose it.
If you think about it, that makes sense. How can a stock sale worth, say, $1000 change the value of the company being sold by $100 million? That doesn't make any sense.
With my formulation, selling a single share at a lower price wouldn't move a company's market cap by hundreds of millions of dollars, ever, unless that share somehow was sold at a loss of hundreds of millions of dollars (that's one pricey share!). Instead, it would decrease only be the amount that was lost on that particular share, which is generally minimal in stock sales.
My approach is much more stable, and would prevent all of these idiotic headlines about "market drops" that we keep hearing about (and market increases, for that matter). It's just more honest all the way around, and furthermore, it's easy to calculate. You can always track each share's individual purchase history, and trivially calculate the value of the company based on that (and the other factors I mentioned), in real time.
It would also prevent the quarterly gaming that goes on, since recent stock sales would not be a major driver for increased (or decreased) valuation. Instead, you'd have to actually improve the company's fundamentals, and as investors and shareholders, isn't that what we really want anyway?
I'm not convinced you have a solution, though. Share price quotes are only of publicly traded shares, so there's no per-share history available. Indeed, I don't think there's a way to distinguish individual shares, in the same way there's no way to distinguish individual dollars in your bank account. And I don't think historic price is more meaningful than last share. Consider Facebook: Zuckerberg bought his shares for $0. Does he really think that's what they're worth? Does anybody?
What we do know is that he won't sell them at current market prices. When investors hold shares like that, it's because they believe they are worth as much or more than the current price. And that's the theory that a market cap valuation is based on: if nobody is selling at the current price in a liquid market, then all the holders apparently think their shares are worth more than what they can sell them for. Ergo, the company price is shares * last price.
It's tempting to compare Evernote to companies like Ducati (apparently recently bought by Audi for $1.1b). But remember Evernote sells software with higher margins. It is still in its growth phase, it's total addressable market includes a large percentage of the global population, and its revenue comes from recurring annual customer purchases.
Personally I think it holds more value than Dropbox, but I guess we'll have to wait and see.
For comparison, the single most important productivity app of the PC era was either Office in general, or just Word in particular. How much are those worth?
http://www.bbc.co.uk/sport/0/football/17769654
What I don't get: couldn't you build something like Evernote for let's say $500mm from scratch? It's not a company, it's a smartphone app!
Evernote has demonstrated that it can monetize its user base, and it has a strong lock-in effect (I store all my stuff there so it's not worth leaving to a competitor). I happily pay for Premium just like many others.
Instagram, on the other hand, has a fantastic free app, a giant user base...and no revenue.
In theory, that should be the same as saying 'my company is worth y% of what company Z is worth, so this is how much cash you need to pay in order to get x% of it', but in practice, you can't always make that conclusion based on how people behave.
How many paying users do they have?
Everyone look under your seat.
You get a billion dollars! you get a billion dollars! you get a billion dollars!
Many of the comments assume that a valuation, derived from stock price or venture financing, is rational.
It is not.
Yes, the value of the business is defined by future cash flow adjusted for time-value of money and risk. In case of new, unknown businesses/industries, without prior history, it is not possible to estimate the future cash flow and the associated risk.
Therefore, if we would look at this from investment angle, I would compare this to a gamble, or, taking into account human component, a poker tournament [from my financial perspective].
P.S.: of course in case of Dropbox and Evernote, which have revenue, it is possible to do some financial modeling, but this would not substitute future cash flow since risk/uncertainty is still an open question.
P.P.S.: in the past the best strategy was to follow the ride and get off the train before everybody else ..... :-)
If you go to a good securities lawyer and say "We need to get a round closed at one billion dollar valuation, but the investors need it to be effectively at a lower valuation because for them 1 billion is just ridiculous" the lawyer will figure out a way to do it. There are all kinds of tools that you can use to ensure that the investors still make money for exits under 1 billion even if the valuation is technically 1 billion.
So this is all just headline grabbing.
Assuming 20M active users and a sky-high 10% conversion rate [+] at $5/month gives $120M/year in revenue, which would kind of justify a $1B valuation. That is, until something better comes along for storing text notes across devices...
[+] I understand their users are pretty f(r)anatic.
Not sure if there any other people out there who feel the same...